SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended June 30, 1997

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from to

                           Commission File No.: 1-5270

                              SOFTNET SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

              New York                                 11-1817252
   --------------------------------        ---------------------------------
   (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

    717 Forest Avenue, Lake Forest, Illinois               60045
   ------------------------------------------          --------------
   (Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code:  (847) 266-8150

                                 Not Applicable
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                    Yes X    No
                                       ---     ---

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

              Class                             Outstanding at June 30, 1997
  -------------------------------             --------------------------------
  Common stock, without par value                         6,609,559

<PAGE>

                              SOFTNET SYSTEMS, INC.
                                      INDEX



                                                                         Page
                                                                        Number
                                                                        ------

PART I    FINANCIAL INFORMATION

 Item 1.  Financial Statements (Unaudited)

           Condensed Consolidated Balance Sheets
               June 30, 1997 and September 30, 1996                        3

           Condensed Consolidated Statements of Operations
               for the Three and Nine Months Ended
               June 30, 1997 and June 30, 1996                             4

           Condensed Consolidated Statements of Cash Flows
               for the Nine Months Ended
               June 30, 1997 and June 30, 1996                             5


 Item 2.   Management's Discussion and Analysis of
               Financial Condition and Results of Operations               9


PART II    OTHER INFORMATION

 Item 4.   Submission of Matters to a Vote of Security Holders            13

 Item 6.   Exhibits and Reports on Form 8-K                               13


SIGNATURES                                                                14



<PAGE>



                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)


                                                       June 30,    Sept. 30,
                                                         1997        1996
                                                       --------    --------
                                                     (unaudited)
         ASSETS
Current assets:
   Cash .............................................  $     15    $    426
   Accounts Receivables, net ........................     7,873       6,074
   Inventories ......................................     4,636       5,904
   Prepaid expenses .................................       212         340
                                                       --------    --------
          Total current assets ......................    12,736      12,744

Property and equipment, net .........................     1,472       2,314
Costs in excess of fair value
  of net assets acquired, net .......................     7,191       8,101
Other assets ........................................     3,037       2,427
                                                       --------    --------
                                                       $ 24,436    $ 25,586
                                                       ========    ========

         LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued expenses ............  $  7,412    $  8,672
   Current portion of long term debt ................     1,104         931
   Deferred revenue .................................     1,298       1,428
                                                       --------    --------
          Total current liabilities .................     9,814      11,031
                                                       --------    --------

Long term debt, net of current portion ..............    10,042      10,762
                                                       --------    --------

Commitments and contingencies

Shareholders' equity:
   Preferred stock, $.10 par value,
     4 million shares authorized,
     none outstanding ...............................        --          --
   Common stock, $.01 par value,
     25 million shares authorized,
     6,609,559  and 6,540,065 shares
     outstanding, respectively ......................        66          65
Capital in excess of par value ......................    33,892      33,517
Accumulated deficit .................................   (29,378)    (29,789)
                                                       --------    --------
          Total shareholders' equity ................     4,580       3,793
                                                       --------    --------
                                                       $ 24,436    $ 25,586
                                                       ========    ========


           The accompanying notes are integral part of the condensed
                        consolidated financial statements


<PAGE>


                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                            Three Months Ended      Nine Months Ended
                                                                 June 30,                June 30,
                                                          ---------------------   ---------------------
                                                            1997         1996       1997         1996
                                                          --------     --------   --------     --------
<S>                                                       <C>          <C>        <C>          <C>
Net sales ............................................    $  9,121     $  9,806   $ 30,073     $ 31,868
Cost of sales ........................................       5,538        6,364     18,378       20,605
                                                          --------     --------   --------     --------
   Gross profit ......................................       3,583        3,442     11,695       11,263
                                                          --------     --------   --------     --------

Operating expenses:
   Selling ...........................................       1,045        1,346      3,333        3,800
   Engineering .......................................         576          470      1,691        1,308
   General and administrative ........................       1,442        2,025      4,357        5,333
   Amortization of goodwill and transaction costs ....         346          240      1,036          930
   Costs associated with change in
      product line and other .........................          --        1,302         --        1,302
                                                          --------     --------   --------     --------
             Total operating expenses ................       3,409        5,383     10,417       12,673
                                                          --------     --------   --------     --------

   Income (loss) from operations .....................         174       (1,941)     1,278       (1,410)

Interest expense .....................................        (291)        (419)      (884)      (1,249)
Gain on sale of available-for-sale securities ........          --           --         --        1,883
Other income (expense) ...............................         (11)         (11)        17            5
                                                          --------     --------   --------     --------
   Income (loss) before provision and
      extraordinary item .............................        (128)      (2,371)       411         (771)

Extraordinary item
   Loss on sale of business ..........................          --       (4,961)        --       (4,961)
                                                          --------     --------   --------     --------

   Net income (loss)                                      $   (128)    $ (7,332)  $    411     $ (5,732)
                                                          ========     ========   ========     ========

Earnings (loss) per share:

   Income (loss) before extraordinary item ...........    $  (0.02)    $  (0.42)  $   0.06     $  (0.14)
   Extraordinary item ................................          --        (0.87)        --        (0.89)
                                                          --------     --------   --------     --------
   Continuing Operations .............................    $  (0.02)    $  (1.29)  $   0.06     $  (1.03)
                                                          ========     ========   ========     ========


Weighted average shares outstanding:..................       6,592        5,702      6,894        5,576
                                                          ========     ========   ========     ========
</TABLE>

           The accompanying notes are integral part of the condensed
                        consolidated financial statements


<PAGE>
                          SoftNet Systems, Inc. and Subsidiaries
                     Condensed Consolidated Statements of Cash Flows
                                      (in thousands)

                                                            Nine months ended
                                                                 June 30,
                                                          --------------------
                                                            1997        1996
                                                          --------    --------
                                                              (Unaudited)
Cash flows from operating activities:
  Net income (loss) .....................................  $   411   $  (5,732)
  Adjustments to reconcile net income (loss)
        to net cash provided (used) by
        operating activities
    Gain on sale of available-for-sale securities .......       --      (1,883)
    Loss on sale of business ............................       --       4,961
    Depreciation and amortization .......................    1,560       1,556
    Gain on sale of assets ..............................      (82)         --
    Provision for bad debts .............................       22          69
    Changes in operating assets and liabilities,
          net of effect of purchase transaction-
             Accounts receivable ........................   (1,977)     (2,063)
             Inventories ................................      741      (2,369)
             Prepaid expenses ...........................      203         183
             Accounts payable and accrued expenses ......     (559)        176
             Deferred revenue ...........................      122       1,010
                                                          --------    --------
                Net cash provided (used) by operating
                  activities ............................      441      (4,092)
                                                          --------    --------

Cash flows from investing activities:
  Purchase of property and equipment ....................     (236)       (914)
  Additions to capitalized product design ...............     (610)         --
  Acquisition of business, net of cash acquired .........       --      (2,007)
  Proceeds from sale of available-for-sale securities ...       --       2,410
  Payment for acquisition costs .........................       --         (83)
  Settlement of remaining obligations to
     owners of discontinued operations ..................       --        (116)
  Increase in other assets ..............................       --      (1,895)
                                                          --------    --------
                Net cash used by investing activities ...     (846)     (2,605)
                                                          --------    --------
Cash flows from financing activities:
  Borrowings under revolving credit note ................    7,973       9,831
  Payments under revolving credit note ..................   (8,284)     (5,586)
  Capitalized lease obligations paid ....................     (173)       (187)
  Proceeds from issuance of long-term debt ..............      737       2,910
  Repayment of long-term debt ...........................     (259)       (143)
  Proceeds from exercise of warrants ....................       --          17
  Payment of put obligation .............................       --        (200)
  Proceeds from settlement of related
     party receivable ...................................       --         819
                                                          --------    --------
                Net cash provided (used) by
                    financing activities ................       (6)      7,461
                                                          --------    --------

Net increase (decrease) in cash .........................     (411)        764
Cash, beginning of period ...............................      426         573
                                                          --------    --------
Cash, end of period ..................................... $     15    $  1,337
                                                          ========    ========

Cash paid during the period for:
    Interest ............................................ $    744       1,125
    Taxes ...............................................       --          --

Supplemental non-cash transactions
    Conversion of debt for common stock .................      381        4084
    Property acquired by capitalized leases .............       --         161
    Businesses acquired with issuance
       of stock and notes ...............................       --       1,022
    Change in unrealized appreciation in
       available-for-sale securities ....................       --        (729)


           The accompanying notes are integral part of the condensed
                       consolidated financial statements
<PAGE>



                     SoftNet Systems, Inc. and Subsidiaries
              Notes to Condensed Consolidated Financial Statements
                             June 30, 1997 and 1996
                                  (unaudited)



1.  Basis of Presentation

The  financial  information,  except for the balance  sheet as of September  30,
1996,  included  herein is unaudited;  however,  such  information  reflects all
adjustments  (consisting  solely of normal recurring  adjustments) which are, in
the opinion of management,  necessary for a fair  presentation  of the condensed
consolidated  statements of financial  position,  results of operations and cash
flows as of and for the interim periods ended June 30, 1997 and 1996.

The Company's annual report on form 10-K for the fiscal year ended September 30,
1996, as filed with the  Securities and Exchange  Commission,  should be read in
conjunction with the accompanying  condensed  consolidated financial statements.
The  condensed  consolidated  balance sheet as of September 30, 1996 was derived
from the Company's audited Consolidated Financial Statements.

The results of  operation  for the nine months  ended June 30, 1997 are based in
part on  estimates  that may be  subject  to  year-end  adjustments  and are not
necessarily indicative of the results to be expected for the full year.



2.  Debt

Debt is summarized as follows (in thousands):
                                              June 30,        September 30,
                                               1997                1996
                                           ------------       -------------
                                            (unaudited)

     Bank Debt                                 $  6,574            $  6,649
     Convertible subordinated notes               3,674               4,011
     Other                                          898               1,033
                                            -----------        ------------
                                                 11,146              11,693
     Less current portion                        (1,104)               (931)
                                            -----------        ------------

                                               $ 10,042           $  10,762
                                            ===========        ============


Subsequent to June 30, 1997,  the Company  received a temporary  increase in its
revolving facility the Company is able to borrow $750,000 in excess of available
assets  through  September  30, 1997.  On October 1, 1997,  the amount of credit
available  under the revolving  credit  facility  reverts to the original amount
available not to exceed $9.5 million.  To date,  the Company has not made use of
this  temporary  increase in the revolving  facility.  In addition,  the Company
obtained an additional credit facility whereby the Company can borrow up to $1.5
million  against  qualified  lease  arrangements  it enters into with customers.
During the nine months ended June 30, 1997, the Company made draws in the amount
of $737,000 against this credit facility. The Company extended the maturity date
of its credit facilities to October 15, 1998.


<PAGE>


                     SoftNet Systems, Inc. and Subsidiaries
              Notes to Condensed Consolidated Financial Statements
                             June 30, 1997 and 1996
                                  (unaudited)


3.  Stock Options and Warrants

Outstanding options and warrants to purchase shares of common stock  at June 30,
1997 were as follows (in thousands, except price per option data):

       Outstanding at October 1, 1996                                     1,569

       Granted at prices ranging from $4.94 to $5.31                        400

       Exercised or canceled at prices ranging from $8.25 to $4.94          (50)
                                                                      ----------

       Outstanding at June 30, 1997                                       1,919
                                                                      ==========

In November 1996 the Company repriced 312,167 employee stock options by reducing
the exercise price from $8.25 to $4.94 per share
(the market price on the date of such change).


4.    Earnings per common share

At June 30, 1997, the computation of both primary and fully diluted earnings per
share were  based on the  weighted  average  number of shares  outstanding.  The
inclusion  of  additional  shares  assuming  the  exercise of stock  options and
warrants  and  the  conversion  of all  convertible  subordinated  notes  had an
immaterial effect on the earnings per share computation.


5.    Supplemental Cash Flow Information

During the nine months ended June 30, 1997,  the buyer of the  operations of the
Company's wholly owned subsidiary,  Communicate  Direct, Inc. repaid $455,000 of
long-term debt and capitalized leases on behalf of the Company.


6.    New Accounting Pronouncements

Effective for periods ending after December 15, 1997, the Company is required to
adopt Statement of Financial  Accounting  Standards No. 128 "Earnings Per Share"
("SFAS  128").  SFAS 128  requires  companies  to  calculate  basic and  diluted
earnings  per share based upon  standards  designed to provide  consistency  and
compatibility  with  calculations  of  other  countries  and  with  that  of the
International  Accounting  Standards  Committee.  The  Company  does not  expect
earnings per share as reported to be materially  different than basic or diluted
earnings per share to be reported upon adoption of the new accounting standard.

Statement of  Financial  Accounting  Standards  (SFAS) No. 129,  "Disclosure  of
Information  about  Capital  Structure,"  was  issued  in  February  1997 and is
effective for periods ending after December 15, 1997. This statement establishes
standards for  disclosing  information  about an entity's  capital  structure by
superseding  and  consolidating  previously  issued  accounting  standards.  The
financial  statements  of the  Company  are  prepared  in  accordance  with  the
requirements of SFAS No. 129.


<PAGE>


                     SoftNet Systems, Inc. and Subsidiaries
              Notes to Condensed Consolidated Financial Statements
                             June 30, 1997 and 1996
                                  (unaudited)


In June 1997 the FASB issued SFAS Statement No. 131, "Disclosures about Segments
of an  Enterprise  and  Related  Information."  This  statement,  effective  for
financial  statements for periods  beginning  after December 15, 1997,  requires
that a public business  enterprise report financial and descriptive  information
about its reportable  operating segments.  Generally,  financial  information is
required to be reported on the basis that it is used  internally  for evaluating
segment  performance  and  deciding how to allocate  resources to segments.  The
Company currently reports its business  segments  reflecting the  organizational
structure of the Company . The Company has not yet determine the impact this new
accounting  standard  will have,  but it does not  believe  the  change  will be
material.



7.       Reclassification

Certain amounts in the combined condensed consolidated  statements of operations
for the prior  fiscal year have been  reclassified  to conform with current year
presentation.


<PAGE>

Item 2.

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations


This Form 10-Q contains "forward looking  statements"  within the meaning of the
Private Securities Litigation Reform Act of 1995, including (without limitation)
statements as to  expectations,  beliefs and future  financial  performance  and
assumptions  underlying  the  foregoing  relating to the ability to meet working
capital   requirements,   capital   expenditure  and  expected  cash  flow  from
operations.  The actual results or outcomes could differ  materially  from those
discussed  in  the  particular  forward  looking   statements.   The  risks  and
uncertainties  that may affect the  operations,  performance,  developments  and
results of the Company's  business include the following:  national and regional
economic  conditions;  market acceptance of the Company's products and services;
the Company's continued ability to provide integrated  communications  solutions
for customers in a dynamic industry, as well as competitive factors.

Results of operations for the three months ended June 30,  1997,compared  to the
same period in 1996.

For the three months ended June 30,  1997,  net sales  decreased by $685,000 (or
7.0%) to $9.1  million  compared to $9.8 million for the three months ended June
30, 1996. Sales in the Company's document  management segment increased slightly
due  primarily  to  increased  volume of systems and spare  parts.  Sales in the
Company's  telecommunications  segment  decreased  $1.2 million (or 24.4%).  The
decrease in sales in the  telecommunications  segment was  primarily a result of
the disposition of  substantially  all of the operations of the Company's wholly
owned subsidiary, Communicate Direct, Inc. ("CDI") in October 1996 (with revenue
of $954,000 for the three months ended June 30, 1996).  The overall  decrease in
sales  was  offset  in  part  by  the  operations  of  MediaCity   World,   Inc.
("MediaCity"),  a provider of Internet services which was acquired in June 1996.
MediaCity added $195,000 to revenue for the three months ended June 30, 1997.

For the three months ended June 30, 1997,  gross profit  increased  $141,000 (or
4.1%) to $3.6  million  from $3.4  million for the same period in 1996.  For the
three  months  ended  June 30,  1997,  gross  profit  as a  percentage  of sales
increased from 35.1% in 1996 to 39.3% in 1997. The percentage  increase  relates
primarily to improving margins in the telecommunications  segment as a result of
the disposition of  substantially  all of the operations of the Company's wholly
owned subsidiary CDI.

Selling, engineering, general and administrative expenses decreased $778,000 (or
20.4%)  to $3.1  million  for the three  months  ended  June 30,  1997 from $3.8
million for the same period in 1996. The decrease in operating  expenses  caused
by the  disposition of CDI and continued cost  reductions in all operating areas
was offset in part by the start-up  operations of the Internet  services segment
and the communication integration group.

Amortization  expense  increased  $106,000  (or 44.2%) to $346,000 for the three
months  ended June 30,  1997,  from  $240,000  for the same period in 1996.  The
increase in  amortization  expense was caused by the acquisition of MediaCity in
June 1996.

The Company has made no provision  for income taxes for the three months  ending
June 30, 1997, as a result of the Company's net operating loss carry forward.

Interest expense decreased  $128,000 (or 30.6%) to $291,000 for the three months
ended June 30, 1997 from $419,000 for the same period in 1996.  Interest expense
decreased  as a result of lower debt  outstanding  during the three month period
ended  June 30,  1997  compared  to the same  period in 1996.  The  decrease  in
outstanding  indebtedness  was  principally  a result of the  conversion of $4.1
million  convertible  subordinated  notes in June 1996 and  reduced  outstanding
indebtedness on the Company's line of credit facility.

For the three months ended June 30, 1997,  net loss before  extraordinary  items
decreased  $2.2  million to $128,000  and loss per share of common  stock before
extraordinary  items  decreased  $0.40 to $0.02,  compared to the same period in
1996.
<PAGE>



                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations



During the three months ended June 30, 1996,  the Company  disposed of a portion
of the  operations  of CDI.  As a result,  the Company  incurred a $5.0  million
extraordinary charge for the disposal of this business.

At June 30, 1997, the computation of both primary and fully diluted earnings per
share were  based on the  weighted  average  number of shares  outstanding.  The
inclusion  of  additional  shares  assuming  the  exercise of stock  options and
warrants  and  the  conversion  of all  convertible  subordinated  notes  had an
immaterial effect on the earnings per share computation.

Results of operations  for the nine months ended June 30,  1997,compared  to the
same period in 1996.

For the nine months ended June 30, 1997, net sales decreased by $1.8 million (or
5.6%) to $30.1  million  compared to $31.9  million for the same period in 1996.
Sales increased in the Company's document management segment by $1.1 million (or
7.2%)  principally as a result of higher volume of units sold as compared to the
same period in the prior year. Sales in the Company's telecommunications segment
decreased   $3.7   million   (or   27.7%).   The   decrease   in  sales  in  the
telecommunications  segment  was  primarily  a  result  of  the  disposition  of
substantially  all of the operations of the Company's  wholly owned  subsidiary,
CDI in October 1996 (with revenue of $5.3 million for the nine months ended June
30, 1996 compared to $142,000 for the same period in 1997). This decrease in the
telecommunications   division  was  offset  in  part  by  the   acquisition   of
Executone-Milwaukee  in December  1995 (which  added $2.6 million to revenue for
the nine months ended June 30, 1997 compared to $1.1 million for the same period
in 1996). In addition,  MediaCity, which provides Internet services, acquired in
June 1996, added $813,000 to revenue for the nine months ended June 30, 1997.

For the nine months ended June 30, 1997,  gross  profit  increased  $432,000 (or
3.8%) to $11.7 million from $11.3  million for the same period in 1996.  For the
nine months ended June 30, 1997, gross profit as a percentage of sales increased
from 35.3% in 1996 to 38.9% in 1997. The percentage  increase relates  primarily
to  improving  margins  in the  telecommunications  segment  as a result  of the
disposition of the operations of the Company's wholly owned subsidiary CDI.

Selling, engineering, general and administrative expenses decreased $1.1 million
(or 10.2%) to $9.4  million for the nine  months  ended June 30, 1997 from $10.4
million for the same period in 1996. The decrease in operating  expenses  caused
by the disposition of CDI ($1.9 million for the nine months ended June 30, 1996)
was offset in part by the acquisitions of Executone-Milwaukee  ($715,000 for the
nine  months  ended June 30, 1997  compared  to $453,000  for the same period in
1996) and MediaCity ($640,000 for the nine months ended June 30, 1997).

Amortization  expense increased $106,000 (or 11.4%) to $1.0 million for the nine
months  ended June 30,  1997,  from  $930,000  for the same period in 1996.  The
increase in  amortization  expense was caused by the  acquisitions  of MediaCity
World (in June 1996) and Executone-Milwaukee (in December 1995). During the nine
months ended June 30, 1996,  the Company  incurred  amortization  expense of the
goodwill which arose from the  acquisition of CDI in October 1994. In June 1996,
the  Company  wrote off the  remaining  goodwill of CDI in  connection  with the
disposition of certain assets. Accordingly,  the nine months ended June 30, 1997
did not include any goodwill amortization from CDI.

During the nine months ended June 30, 1997, the Company sold  available-for-sale
securities for net proceeds of $2.4 million. Accordingly, the Company recorded a
gain on the sale of available-for-sale securities of $1.9 million.

The  Company's  has made no provision for income taxes for the nine months ended
June 30, 1997, as a result of the Company's net operating loss carry forward.

<PAGE>



                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations


Interest expense  decreased  $365,000 (or 29.2%) to $884,000 for the nine months
ended June 30,  1997 from $1.2  million  for the same  period in 1996.  Interest
expense  decreased as a result of lower debt  outstanding  during the nine month
period ended June 30, 1997 compared to the same period in 1996.  The decrease in
outstanding  indebtedness  was  principally  a result of the  conversion of $4.1
million  convertible  subordinated  notes in June 1996 and  reduced  outstanding
indebtedness on the Company's line of credit facility.

For the nine months ended June 30, 1997, net income before  extraordinary  items
increased  $1.2 million to $411,000 and  earnings per share  increased  $0.20 to
$0.06, compared to the same period in 1996.

During the nine months ended June 30, 1996, the Company disposed of a portion of
the  operations  of CDI.  As a  result,  the  Company  incurred  a $5.0  million
extraordinary charge for the disposal of this business.

At June 30, 1997, the computation of both primary and fully diluted earnings per
share were  based on the  weighted  average  number of shares  outstanding.  The
inclusion  of  additional  shares  assuming  the  exercise of stock  options and
warrants  and  the  conversion  of all  convertible  subordinated  notes  had an
immaterial effect on the earnings per share computation.


<PAGE>


                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations



Liquidity and Capital Resources

At June 30, 1997 the Company's  current ratio was 1.30 to 1 with working capital
of $2.9  million.  This  compares  with a current ratio of 1.16 to 1 and working
capital of $1.7 million at September 30, 1996.

For the nine  months  ended June 30,  1997,  cash flows  provided  by  operating
activities were $441,000  compared to $4.1 million used by operating  activities
for the same  period in 1996.  Cash  flows  used by  investing  activities  were
$846,000  for the nine months  ended June 30, 1997  compared to $2.6 million for
the same period in 1996.  The decrease in cash used in investing  activities was
primarily a result of decreased mergers and acquisition activity during the nine
months ended June 30, 1997  compared to the same period in the prior year.  Cash
flows used by  financing  activities  were $6,000 for the nine months ended June
30, 1997 compared to $7.5 million provided by investing  activities for the same
period  in 1996.  Borrowings  from the  Company's  line-of-credit  facility  was
significantly reduced during the nine months ended June 30, 1997 compared to the
same period in the prior year due to the overall  improvement  in the  Company's
operations.

Subsequent to June 30, 1997,  the Company  received a temporary  increase in its
revolving  facility  whereby the Company is able to borrow $750,000 in excess of
available  assets through  September 30, 1997. On October 1, 1997, the amount of
credit  available under the revolving  credit  facility  reverts to the original
amount  available not to exceed $9.5 million.  To date, the Company has not made
use of this  temporary  increase in the  revolving  facility.  In addition,  the
Company obtained an additional credit facility whereby the Company can borrow up
to $1.5  million  against  qualified  lease  arrangements  it  enters  into with
customers. During the nine months ended June 30, 1997, the Company made draws in
the amount of $737,000  against this credit  facility.  The Company extended the
maturity date of its credit facilities to October 15, 1998.

The Company expects to be able to finance its working capital  requirements  and
capital  expenditures  from its operating income and existing credit  facilities
for the fiscal year ending September 30, 1997.

Adoption of New Accounting Standards

Reference is made to Note 6 to the Condensed Consolidated Financial Statements.


<PAGE>



PART II. OTHER INFORMATION


ITEM  4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM  6.   EXHIBITS AND REPORTS ON FORM 8-K

           (a)     Exhibits

                   Exhibit 27:  Financial Data Schedule

           (b)     Reports on Form 8-K

                   No reports on Form 8-K were  filed by the Company during the
                   quarter ended June 30, 1997.


<PAGE>



SIGNATURES

In accordance with the requirements of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

                                        SoftNet Systems, Inc.

                                        /s/    A.J.R. Oosthuizen
                                        ---------------------------
                                        A.J.R. Oosthuizen
                                        President and Chief Executive Officer


                                        /s/ Martin A. Koehler
                                        ---------------------------
                                        Martin A. Koehler
                                        Vice President - Finance and
                                        Chief Financial Officer



Dated:  August 14, 1997